60 Minutes Does Ohio, Tearfully

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Last Sunday, two days before Ohio Democrats voted in the Buckeye state’s March 4 presidential primary, 60 Minutes broadcast a very compelling story from Chillicothe, a town of some 22,000 about an hour’s drive south of Columbus. Presenter Steve Kroft interviewed a sad-eyed worker who cried softly as he related his despair that he will lose his job in a paper mill this November. Mr. Kroft also interviewed an equally sad-eyed executive from another local paper company, Glatfelter Co., who said he didn’t know how he could continue to compete when he pays American workers some $20-per-hour and his Chinese competitors pay their workers a small fraction of that. We need tariffs to level the playing field, the businessman told Mr. Kroft, who then earnestly asked Democrats Hillary Clinton and Barack Obama if they agreed that protectionist tariffs were the answer to the woes of American manufacturing. It was powerful television.

Not to spoil a great story, or to deprive anyone of an opportunity for a good cry. But perhaps more than a few viewers might have refrained from reaching for their hankies if they had known a few basic economic facts that 60 Minutes didn’t tell them. Consider first the executive from Glatfelter’s Chillicothe paper plant with the fearful look in his eyes as he talked about China. Glatfelter is headquartered in York, Pa., and its Chillicothe operation is one of several in Ohio and Pennsylvania. But there’s more. Glatfelter employs more than 3,800 people worldwide, including Germany, the United Kingdom, and the Philippines — plus an office in…China. Last year, Glatfelter reported record profits. And it turns out that the soon-to-be unemployed Ohio paper worker’s job is indeed moving — but to Wisconsin, not China.

The awkward thing about facts is that they can get in the way of a great story.

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Shrimp Shame

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A three-judge World Trade Organization panel has ruled America’s method for taxing shrimp imports out of line with the country’s WTO obligations. What happens next will say a lot about the credibility of American leadership in promoting free trade.

The new WTO ruling is the latest twist in a politically charged case involving some $2 billion in annual shrimp exports to the U.S., counting not just India and Thailand — the two countries pressing the current litigation — but also China, Vietnam, Brazil and Ecuador. Three years ago, the U.S. Commerce Department slapped punitive duties ranging from 4% to 113% on shrimp from the six countries, alleging that they had been “dumping” their seafood delicacies in the U.S. at “unfairly” low prices.

That move was bad enough. But then U.S. Customs officials made matters worse by rolling out a novel accounting trick. Customs decided that shrimp imports from the six involved countries would be subject to a newfangled policy concoction called “continuous bonds.”

In practice, that meant that an importer who planned to bring in, say, $100 million annually in shrimp subject to a 6% antidumping tariff would normally be required to post a $6 million cash deposit to cover the expected duties. On top of that, the importer would pay a $50,000 surety bond as “insurance” that payment can be made, in case import duties — which can subsequently be raised or lowered by Commerce officials — exceed the expected amount that year. Such bonds are backed by credit lines extended by the duty payer’s banks.

But the new continuous-bond policy morphed the traditional $50,000 bonds into a bond equal to the expected-duty deposit over again — meaning in the example above a bond of $6 million, in addition to the $6 million cash deposit importers already had to put up. While Customs was aiming at foreign exporters, the agency ended up squeezing the American importers who normally pay the duties.

For importers, the continuous bonds have been a continuous nightmare. They’ve been forced by lenders to scramble to obtain enormous annual credit lines, secured by putting up a portion of their businesses as collateral. Whether or not the importers end up having to borrow against their credit lines, the burdensome bonds constrain their ability to raise capital to re-invest in their businesses, as assets against which they could ordinarily borrow are already tied up. Predictably, some U.S. shrimp importers have been forced to exit the business, as their credit lines have been over-extended.

Customs officials justified the new policy — which was announced without official prior notice in the Federal Register, and thus with no opportunity for affected importers to comment publicly — as necessary to prevent possibly shady shrimp importers from failing to ante up duties when they are calculated at year’s end. Such evasions had occurred in previous antidumping cases involving Vietnamese catfish and Chinese crawfish.

But when the National Fisheries Institute, whose members import some 80% of the seafood that Americans eat, challenged the Customs’ paperwork burdens in the New York-based U.S. Court of International Trade, evidence of unsavory political calculations surfaced. Citing the agency’s internal documents, U.S. Judge Timothy Stanceu found that Customs officials had been motivated “by domestic political pressures to take action directed against the shrimp importing industry.” The bureaucrats had calculated that lawmakers from shrimp-producing states wielded more influence on important congressional committees than did representatives from shrimp-importing states. Despite that finding, the case is still wending its way through the federal courts.

Meanwhile, India and Thailand pursued their own claim against the U.S. at the WTO. Last Friday, they prevailed, when a three-judge dispute panel declared the continuous bonding policy inconsistent with America’s obligations as a WTO member. The U.S. will likely appeal the finding.

Better, though, to comply with the decision by dropping the burdensome bond sham. When the U.S. prevails in WTO litigation, Uncle Sam expects the foreigners to comply forthwith. Now, Asians are asking that American officials do the same. Doing so would enhance America’s credibility both in the WTO’s dispute-resolution system and at the negotiating table for further trade liberalization, not to mention the benefits to America’s own shrimp importers and consumers. Surely, U.S. trade policy has bigger shrimp to fry.

Book Review: India: The Emerging Giant by Arvind Panagariya

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India: The Emerging Giant
by Arvind Panagariya
Oxford University Press, 514 pages, $39.95

 

For nearly four decades there have been only a handful of serious scholarly studies of what makes the economy of the world’s second most populous country tick. And no wonder, since there wasn’t much ticking going on. Despite promises of reasonably enlightened economic leadership after its 1947 independence from British rule, by the 1960s India had become one of the world’s worst economic performers—an infuriatingly inward-looking, impoverished, protectionist basket case. After such leading economic theorists as Jagdish Bhagwati warned in the early 1970s that India’s economy was headed south, there really wasn’t much more to add.

Now an economy that stagnated for a generation has been taking off, growing more than 8.5% annually. In a book as impressive as the economy it describes, Columbia University economist Arvind Panagariya—fittingly, the holder of the Jagdish Bhagwati chair at Columbia’s School of International and Public Affairs—has the story.

Since the reform process got underway in the early 1990s, India has been on the move. Such formerly closed major sectors including banking, telecommunications, pharmaceuticals and airlines have been liberalized, and average industrial tariffs, once as high as 340%, have fallen to around 10%. The reforms, particularly those directed at embracing international trade, have paid off in real growth.

In 1990, India’s merchandise exports were $18.1 billion, a number that wouldn’t double for 10 years. But such exports have doubled again in just the past three years, to $102.7 billion. India’s service-sector exports, just short of $30 billion three years ago, have shot up to more than $60 billion. Overall, trade now amounts to more than 43% of the Indian GDP. And while the exact numbers are subject to debate, there is no doubt that hundreds of millions of Indians have been pulled out of poverty. The professor finds much to applaud.

Mr. Panagariya, however, is hardly a cheerleader. While he believes that India’s impressive growth is likely to be sustainable, as long as reforms continue, he scoffs at fashionable predictions that India will pass China in the coming half century. “Such long-term predictions have no more validity than astrological predictions,” he quips. The economist has the numbers to show that India still has a long way to go: India’s share of world merchandise exports has doubled since 1990, but is still only about 1%. By contrast, China’s share of global merchandise exports rose to 6.5% by 2004 from 2.8% in 1984. And while India’s exports of goods and services are now in the 20-plus percent range of its economy, China’s trade in goods and services shot up to 65% of its GDP in 2004 from 20%. And since 1990, India’s share of manufacturing to its total economic output has “stagnated at 17 percent.” In sum, to overtake China in 30 years, Mr. Panagariya figures, India would have to sustain its present growth, while China’s own presently double-digit growth would have to fall to about 5%. The most sobering calculation is that despite the great strides in reducing poverty, perhaps 300 million of India’s 1.1 billion people still subsist on some $1 per day.

Beyond competition with China, Mr. Panagariya analyzes just about every economic issue that India faces, from macroeconomic topics including capital markets and trade in derivatives and bonds, to the performance of specific sectors like agriculture, banking, insurance, infrastructure, water supply, electricity and education. But for general readers, perhaps the most interesting parts of this book would involve the classical “political economy” questions. How did India dig itself into such an economic hole and what remains to be done?

Mr. Panagariya explains the first part of the question by focusing on what happened after Indira Gandhi became prime minister in 1966, a position she held (excepting the three years between 1977 and 1980) until she was assassinated in 1984. By the time Mrs. Gandhi took office, evolving Asian tigers like South Korea were already looking outward. But India remained insular, evidenced by the combination of high tariffs, quotas, price controls and the infamous License Raj system of bureaucratic control that discouraged both imports and productive investments. “Socialism with a vengeance,” Mr. Panagariya sums up this period. Under Mrs. Gandhi’s leadership, India’s economy became strangled in red tape and protectionism. The licensing regime was further tightened, while she nationalized banks, insurance firms, the coal and oil industries, and discouraged foreign investment and international trade.

While such ideas certainly appear, well, less than bright, Mr. Panagariya is more interested in explanations than condemnations. For instance, he observes that in regard to bank nationalizations, “it was widely believed that commercial banks effectively excluded farmers and small entrepreneurs from their lending operations, and that the government needed to do something to improve the access of these groups to credit.”

Meanwhile, as if India wasn’t already doing enough to cripple its growth, there were external shocks: wars with Pakistan in 1965 and 1971, a 1962 war with China, consecutive droughts from 1971-73 and also the oil-price shock in October 1973.

Since 1991 India has gotten back on track, increasingly embracing globalization by lowering tariffs, removing import licensing, welcoming foreign investment and otherwise encouraging more Indian industries to compete in global markets. To cite just one example of how fast India can grow given the right policies, Mr. Panagariya references the opening of airlines to market forces, mainly in this decade. Domestic airline passengers numbered 8.1 million in 1991 and increased to 13.3 million in 2000; by 2005 passenger numbers had shot up to 22.7 million.

Still, Mr. Panagariya rightly points out that much more needs to be done. India’s ports remain clogged. Roads, particularly in poor rural areas, remain inadequate. Tariffs and subsidies, especially in the notoriously weak agriculture sector, are still too high. Thanks to nightmarish labor laws that kill entrepreneurial activity, rent control and restrictions on land use, urban infrastructure reform appears “intractable.”

Despite the daunting challenges, Mr. Panagariya has reason to be optimistic. Indian elites who once refused to heed the warnings of his mentor Mr. Bhagwati are now paying attention. It is now “unthinkable” that the days of the License Raj will return. Add India to China and the other Asian tigers that have become worthy of the attention of world-class economists like Mr. Panagariya.